In this Sunday’s commentary in the Richmond Times-Dispatch, Steven Horwitz reminds us of Hayek’s insights regarding the use of knowledge in society as we attempt to make sense of the increasing government involvement in the economy under our new President, Barack Obama. From employing “czars” in various industries, over dismantling General Motors, to restructuring the financial sector, and most recently, to “fixing” healthcare, it becomes ever more apparent that our president seems to suffer from, what Hayek calls, the “fatal conceit,” believing that  well-intentioned politicians are able to bring about better outcomes than cooperating individuals in the market can.

In Hayek’s view, what enables businesspeople to make good decisions about the allocation of resources is not that they are smarter than other people. Instead, two other factors are key.  First, businesspeople have very detailed knowledge of their particular corners of the world. They know where resources are, where their customers are and what they want, and have the experience of knowing how to deliver it. This is not about being “smarter,” but about having local and contextual knowledge that others don’t have.  Second, entrepreneurs develop this knowledge by making use of the signals provided by prices, profits, and losses. Prices guide entrepreneurial decision-making by enabling them to formulate budgets and estimate the profitability of the various choices they might make.  Profits and losses provide information after the fact about how well they chose. Profits signal them to continue, while losses tell them that resources need to be reallocated. By acting on the basis of that information, each entrepreneur contributes to the overall improved allocation of resources.

Absent the signals of the marketplace, czars, presidents, and members of Congress are thrashing around in the dark in their attempts to improve upon the outcomes generated in actual markets. Top-down directives forgo the opportunity to learn from the decentralized knowledge of those actually producing the goods and services in question.

Meanwhile, President Barack Obama continues to emphasize that he is in favor of “what works.” We have to wonder how it is that he has missed the lessons that history has taught us on how top-down central planning does not work?